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Stable quarter, quick commerce investments in focus GOV growth for quick commerce beats estimates (again)

* Zomato delivered another robust quarter as 2QFY25 revenues of INR48b grew 14% QoQ, in line with our estimate of 14% QoQ growth. Growth was led by Blinkit (GOV up 25% QoQ/122% YoY). Food delivery business also continues to deliver 20%+ YoY growth in GOV and revenue with steady margins. Adjusted EBITDA as % of GOV margin was up 20bp QoQ at 3.4%. PAT came in at INR1.8b (est. INR1.4b) and grew 389% YoY. For 1HFY25, revenue/adj. EBITDA grew 71.1%/1086.8%. vs. 1HFY24. For 2HFY25, we expect revenue/ adj. EBITDA to grow by 68.5%/123.0% YoY. Our view: Investments in quick commerce top priority

* Blinkit expansion a key focus area: Zomato is focusing on aggressively expanding Blinkit by entering new cities and deepening its presence in existing markets. This includes broadening product categories like beauty, electronics, and toys, and opening larger dark stores. It recently added 152 new stores along with seven additional warehouses, bringing the total count closer to the target of 1,000 stores by FY25 (791 as of 2Q). Contrary to earlier expectations, quick commerce could become a viable alternative to kirana stores even in non-metro cities.

* Capital raise to strengthen position and enable Blinkit to hold inventory: With rising competition in the quick-commerce space, Zomato aims to shore up its defenses through a strategic capital raise, with an upper cap of USD1b. This capital raise will ensure Zomato maintains financial flexibility, allowing it to continue scaling Blinkit while countering competitive pressures effectively. It also allows Zomato to change its ownership structure in favor of Indian investors – this should allow the company to hold inventory in its quick commerce business.

* This cash burn is different from food delivery: Now that the business model is established, we are entering a phase of focused investments in quick commerce. We expect all quick commerce players, including Zepto, Swiggy and a few new entrants, to invest over the short to medium term (2-3 years).

* This “cash burn” is, however, different from the one we witnessed when food delivery was scaling up. Contrary to countless questions on whether food delivery would ever be profitable, the viability of the “dark store model” is now beyond doubt: mature dark stores are already contribution margin positive. New dark stores are reaching breakeven GOV faster (see Exhibit 11). Hence, investors will be far more lenient this time, and revenue growth could be higher for longer, as companies unlock new cities, markets, and categories.

* Range-bound contribution margins: With increased investments in new infrastructure and fixed costs, the immediate priority is growth and customer acquisition while maintaining a 4-5% EBITDA margin target for the long term.

Valuation and change in estimates

* Zomato’s food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and e-commerce. Our estimates are largely unchanged as the increase in Blinkit GOV as a result of dark store network expansion is offset by decreased profitability owing to increased capex and investments. Zomato should report PAT margin of 4.7%/8.6%/12.9% in FY25/FY26/FY27. Our DCF-based valuation of INR330 suggests a 28% upside from the current price. We reiterate our BUY rating on the stock. Food delivery GOV misses slightly, Blinkit GOV beats our estimates; QIP raise of INR85b approved

* Zomato reported 2QFY25 net revenue of INR48b (+14.0% QoQ/68.5% YoY), in line with our estimate of +14% QoQ.

* Food Delivery GOV came in at INR97b, slightly below our estimate of INR101b. Blinkit GOV came in at INR61b (up 120% YoY) vs. our estimate of INR59b.

* Consol. reported EBITDA came in at INR2,260m (4.7% reported EBITDA margin vs. 4.2% in 1Q).

* For Food Delivery, adjusted EBITDA as % of GOV margin was up 10bp QoQ at 3.5%.

* Blinkit reported contribution margin of 3.8% (4.0% in 1Q). Adj. EBITDA margin was -0.1% vs. our expectation of 0.1%. Contribution margins were flat as a result of the expansion of dark stores; mature dark stores are already approaching healthy profitability.

* Food Delivery revenue grew 4% QoQ/30% YoY (est. 10% QoQ).

* Contribution margin inched up slightly to 7.6% (7.3% in 1Q).

* PAT stood at INR1.8b, up 389% YoY (est. INR1.4b) vs. INR360m in 2QFY24.

* YoY adj. revenue growth was steady at 58% and continued to trend above the stated outlook of 40%+.

* Zomato will raise INR85b via QIP to strengthen its balance sheet in response to the capital raising efforts by competition.

Key highlights from the management commentary

* Food Delivery: YoY adjusted revenue growth was steady at 58% and continued to trend above the stated outlook of 40%+. GOV growth of 20% YoY is expected to continue. The fluctuation in take rate is due to seasonality and changes in the restaurant mix, leading to this moderation in 2Q.

* Blinkit: New stores are now reaching ~INR 0.7m of GOV per day in the first full quarter after the launch, a level when they reach contribution break-even. Zomato added 152 net new stores and 7 warehouses. Since new stores and warehouses take a few months to ramp up, they tend to be margin-dilutive in the short term. The bulk of capex is used for store expansion, with the addition of 7 new warehouses. This new store capex is recorded above the contribution line.

* Zomato will raise INR85b via QIP to strengthen its balance sheet in response to competitors' fundraising.

* There is a tax on treasury income. Operational profit is still offset by carryforward losses.

* A new app – District - will be launched in the coming weeks, focusing on transitioning to the dining and ticketing businesses. Zomato will explore more categories in the future, if feasible.

Valuation and view

* Zomato’s food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and e-commerce. Our estimates are largely unchanged as the increase in Blinkit GOV as a result of the dark store network expansion is offset by decreased profitability owing to increased capex and investments. Zomato should report PAT margin of 4.7%/8.6%/12.9% in FY25/FY26/FY27. Our DCF-based valuation of INR330 suggests a 28% upside from the current price. We reiterate our BUY rating on the stock.

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